UBS MIGHT struggle to attract big institutional investors for more loss-absorbing bonds it wants to sell, after investors voiced distaste for the structure and price of an initial $2 billion deal announced yesterday.
UBS’s new bonds are designed to help bolster the bank in tough times by absorbing losses. Their value can be written down if the bank’s common equity Tier 1 ratio – a measure of financial strength – falls below 5 per cent or hits non-viability.
The bank, which needs to raise a total of roughly $16 billion to meet new capital rules, said yesterday it was weighing issues in other regions and currencies which are likely to exceed $1 billion in size. UBS attracted $5.5 billion of demand from investors, which UBS said included private banks, long-only asset managers, hedge funds and banks investing for their own portfolios, in Asia and Europe.
But they also drew sharp criticism from several potential institutional buyers, who said similar issues from UBS and other banks will be a tough sell. The UBS issue is a closely-watched gauge of investor demand for subordinated deals with permanent write-down features.
“It’s clearly not an investor-friendly structure. There are lots of embedded options by the issuer and the regulator, and one is the non-viability option,” said Philippe Kellerhals, senior portfolio manager at London-based Cairn, an asset management and advisory firm.
“Another is the Basel III capital trigger: when that happens, investors in these notes get completely wiped out.” Ratings agency Standard Poor’s estimates banks will have to raise about $1 trillion in capital to replace old hybrid instruments which no longer qualify as loss-absorbing under the Basel III reforms aimed at making banks more crisis-proof.
Fixed-income specialists also criticised the pricing on the UBS bonds, which offer lower yield than senior notes currently on offer from Dutch co-operative Rabobank.
UBS maintained that it was happy with the issue’s reception, and that investors were “comforted” by the bank’s Tier 1 capital ratio of 14.1 per cent under Basel 2.5, compared with the 5 per cent trigger. – (Bloomberg)
